Dollar Falls on Weak US Retail Sales and Consumer Sentiment Reports

The dollar index (DXY00) experienced a decline of 0.27% on Friday due to poor US retail sales and consumer sentiment reports, shifting the likelihood of a September Federal Reserve rate hike to 32% from 35% on Thursday. Despite a rise of 5 basis points in the 10-year Treasury note yield, driven by inflation concerns, the dollar's decrease was tempered by a reduction in safe-haven demand following President Trump's apparent abandonment of plans for any new military action against Iran.

Instead, Treasury Secretary Bessent announced that the administration will soon unveil unprecedented economic measures against Iran, a first in the history of economic isolation. Meanwhile, Iran targeted two vessels in the Strait of Hormuz on Thursday night. Despite the economic setbacks, July's US retail sales fell 0.6% month-over-month, falling short of the market's +0.1% expectation.

Both ex-autos and gas, retail sales declined 0.2% month-over-month, further indicating consumer caution due to high prices, rising gas costs, and financial uncertainty. The University of Michigan's preliminary August US consumer sentiment index dipped by 4.2 points to 51.0, lower than the anticipated 0.2-point drop from July's 55.2.

The markets anticipate a 32% probability of a 25 basis point rate hike at the upcoming FOMC meeting on September 15-16, down from 35% on Thursday and 51% as recently as Tuesday. The Euro/US Dollar (EUR/USD) rose 0.34% on the dollar's weakness, while the odds of a September European Central Bank rate hike at 92% surpass the 32% odds of a Fed rate increase, bolstering the euro's interest rate differential.

USD/JPY (USD/JPY) slipped 0.08% due to the dollar's decline. The yen benefits from anticipated BOJ rate hikes, with Japanese Prime Minister Sanae Takaichi's government supporting a BOJ rate hike in September or October. Additionally, there are fears of further intervention if the yen weakens further. The markets forecast an 81% likelihood of a 25 basis point BOJ rate hike at the September 18 policy meeting, up from 63% on Wednesday.

Precious metals, such as October COMEX gold (GCV26) and September COMEX silver (SIU26), rose due to the weaker dollar and diminished Fed rate hike expectations. Concerns over reduced fund liquidation of precious metals are bearish for prices, with long positions in gold ETFs falling to a 10.25-month low on July 27, after reaching a 3.5-year high on February 27.

Likewise, long positions in silver ETFs hit a 1-year low on July 14, down from the 3.5-year high on December 23.